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Dubai has quietly won a moral victory over the credit rating agencies, particularly Standard & Poor’s, without much ado or fanfare.

When S&P issued a series of downgrades and comments in 2010 calling for more transparency in the affairs of Dubai government companies, particularly during and after the run-up to the request for a standstill on the $22 billion (Dh80.8 billion) debts of Dubai World, the Dubai authorities had questioned the agency’s conclusions. Dubai Holding went on to announce it was dropping S&P as its rating agency for its lack of understanding of the group’s business, operations and relationship with the Government of Dubai.

“Although DHCOG has been engaging with S&P and sharing adequate information frequently and in a transparent manner, S&P has, nevertheless, issued inaccurate statements coupled with factual errors that are misleading. Therefore, DHCOG discredits and disagrees with the content of the latest S&P report dated January 25 2010,” a Dubai government statement had pointed out.

The daring move caused quite a few eyebrows to be raised: how could the emirate take on an entity with the clout and pre-eminence of Standard & Poor’s? But Dubai showed the courage of conviction and stuck to its guns.

Today, the Dubai authorities stand vindicated as the leading rating agency is under fire from the US government for its role in creating the world’s worst financial crisis since the Great Depression. The US Justice Department has accused the agency of “corrupting its ratings process to curry favour with large banks, which paid the agency billions of dollars in return”. A lawsuit seeking penalties of $5 billion (Dh18.36 billion) from S&P alleges that the agency had been driven by a desire to increase revenue and market share and was favouring the interests of investment banks that sold the securities at the expense of investors.

Downplaying risks

S&P issued credit ratings on more than $2.8 trillion of residential mortgage-backed securities and about $1.2 trillion of collateralised-debt obligations between September 2004 and October 2007, downplaying the risks to gain more business from the investment banks that issued them, the Justice Department charged. According to the complaint, S&P falsely represented to investors that its credit ratings were objective, independent and uninfluenced by any conflicts of interests.

The contents of the lawsuit are shocking. One part reportedly says S&P employees joked about the company’s willingness to rate even deals “structured by cows”, singing and dancing in utter disdain of what was going on. It quotes from a message from one employee to another: “We rate every deal; it could be structured by cows”.

“Let’s hope we are all wealthy and retired by the time this house of cards falters,” another email extract says.

It is an irony of the highest order that while S&P stands increasingly damned with these disclosures, interest in Dubai’s debt has heightened in the wake of accelerated economic growth and fall in credit swap rates to more than half in one year. The change has enabled issuers to take advantage of lower yields to boost cash and find alternatives to bank lending. In fact, the availability of cheaper credit is helping Dubai borrowers to renegotiate debt payment terms. It couldn’t have come at a worse time for S&P.

The Dubai government has just announced the successful completion of a landmark $1.25 billion sukuk issue. The dual-tranche transaction raised the amount across 10-year and 30-year tenures, the latter being the longest ever. Having been oversubscribed 12 times and more, the issue has demonstrated tremendous investor appetite and a positive market outlook towards Dubai debt, paving the way for a number of high profile issues by other entities. These signals cannot be lost on the credit rating agencies, which will now get into their act.

There is hardly any difference in the way rating agencies go about doing their business: pick up each other’s views, facts and fiction and start promoting those as gospel truth. It’s all made to sound sophisticated, but the overarching considerations remain the same.

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